Canadian juniors' cash holdings start to look fat as market caps sink

Junior market capitalization have sunk hard leaving some juniors sitting on hefty cash piles. Meanwhile some analysts suggest it's time for investors to start hunting.

Author: Kip Keen
Posted: Friday , 13 Apr 2012
http://www.mineweb.com/mineweb/view/mineweb/en/page66?oid=149290&sn=Detail&pid=92730

HALIFAX, NS (MINEWEB) -

For juniors overall 2011 and 2012, so far, have been a veritable plague. Many a junior market capitalization has painfully shrunk. There are often individual reasons beyond general market malaise for that pain, of course. Some juniors have disappointed (former) investors with lackluster plans for minerals assets. Some may be in project development periods that are too boring for the gambler. But beyond those and other individual causes, it is hard to ignore the greater downward pressure on speculative investing over the past year or so as paramount. And this plague - symptoms of which include feverish risk aversion - has left some members of the broader junior population with, relative to market capitalization, fatty stores of cash.

In a non-comprehensive selection of junior explorers holding cash worth at least 20 percent of their market capitalization - compiled over the course of a few hours research - you'll find some truly astonishing figures. One junior, Gobimin (TSX-V: GMN), with a market capitalization around C$44 million held some $60-odd million in cash at last count (late last year.) Meanwhile seven other junior explorers on the list held, or were set to hold, cash worth more than half the value of their market capitalizations: Canaco Resources (TSX-V: CAN), Canada Fluorspar (TSX-V: CFI), Keegan Resources (TSX: KGN), Metalex Ventures (TSX-V: MTX), Southern Arc Minerals (TSX-V: SA) and a merged Regulus Resources (TSX-V: REG) and Pachamama Resources (TSX-V: PMA, merging now unfolding).

A good number of other juniors were not far behind. Allana Potash (TSX: AAA) held C$55 million cash as compared to a C$113 million market cap. Prodigy Gold (TSX_V: PDG), after a recent financing, will hold some C$63 million cash versus its C$188 million market capitalization. And Exeter Resource (TSX: XRC) has about C$72 million in its kitty and a market capitalization of C$225 million.

A quick look at a few junior producers tells a similar tale of deflated market capitalizations versus inflated cash piles. Nevsun Resources (TSX: NSU) held at least $347 million in cash, about 60 percent its C$578 million market capitalization. Capstone Mining (TSX: CS), with a market cap just over a C$1 billion, had nearly half that in the bank.

This cash bloat has at least one common cause. Over the past year many of these juniors followed a very similar shareprice history: heavily down as the junior market soured. That has inflated cash reserves. Gobimin is trading around C$0.65, which is well off recent highs of around C$0.80. Allana was well over C$1.50 in the first half of last year. Now it's closer to C$0.50. Keegan Resources traded near C$8 during the first half of last year whereas these days it's closer to C$3. Exeter was between C$4 and C$5 for much of last year, but recently hit C$2.50 or so. Canaco Resources was over C$4.00 mid last year. It is now under C$0.86. And, finally, producers such as Nevsun and Capstone are significantly off higher trading ranges that they enjoyed last year.

No doubt there are particular circumstances at work in these - and many other - junior stories that, to varying degrees, make cash holdings look more incredible than they really are. Things like mega projects that will need fullsome financing to go forward or looming capital spending programs set to expand or extend production. But in this cash bloat there is also the far more pervasive current: a general, incontrovertible market sickness eating away at junior market caps and leaving cash constitutions comparably olympic in health.

These cash highs may support an emerging sentiment among analysts that, on the whole, the junior market is oversold. Meaning: it could be time to invest in some juniors. Canaccord's junior mining team recently let it be known it thinks so as far as the gold sector. Making the time-to-buy case in its daily newsletter the Morning Coffee Canaccord put it this way. "Despite all of this negative vibe on gold equities, our Junior Mining Team believes that technically, fundamentally, and intuitively, they appear oversold. The best part is that, when the bulk of investors are nervous, and selling, is when smart money is selling faster. We jest, but is it time to plug your nose and dive in? We think so."

Similarly, Haywood Securities argued in a recent roundup of gold and silver equities that some juniors are looking cheap. "The market selloff that affected much of 2011 has surfaced a number of interesting investment opportunities in the gold & silver space." As advice to shoppers, Haywood added, "Our preference is for companies with the same core advantages that have rewarded investors in the past, including management strength, technical expertise, projects with geological merit and attractive cash to market capitalizations."

Are the wolves to come out then? picking off those juicy stragglers in the junior herd? If they are they will undoubtedly consider cash, among other equally important factors, in making their choices. This is more true now than it was in recent years. Financing sources have gone dry and if tougher financing days are here to stay, then some juniors are going to wither. But that ultimately could be good for investors and juniors as the former separate the the meat from the bones. In recent years, with such a vast number of juniors to choose, some argue a sort of junior cannibalism occurred. Too few investors have spread precious dollars between a glut of competing stories. With fewer juniors stories for sale, however, it would be easier to reward those with promising mineral assets.

Another Chinese steel giant flexes muscle in Labrador Trough

Hebei Iron & Steel is the latest to strike a deal in the Labrador Trough, an iron ore jurisdiction in Canada that is luring Chinese interest, announcing a C$194m purchase agreement with Alderon

Author: Kip Keen
Posted: Friday , 13 Apr 2012
http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=149386&sn=Detail

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HALIFAX, NS (MINEWEB) -

Analysts have said China wants to diversify away from the big three iron ore producers that command most of the seaborne iron ore trade, striking its own deals on iron ore projects around the world. In Canada the iron ore play that is becoming the go-to place for the Chinese is the increasingly prospective Labrador Trough. Rich in iron deposits, it runs for hundreds of kilometres through much of northeastern Quebec and western Labrador.

That appetite for diversification was on display Friday. Chinese steel-giant Hebei Iron & Steel and Canadian junior Alderon Iron Ore (TSX: ADV) announced a deal that has Hebei, reportedly China's largest steel producer, buying a 19.9-percent stake in Alderon and a 25-percent interest in its chief iron ore asset, the Kami project in the Labrador Trough. If the deal goes through, Hebei will get two seats on the Alderon board.

Hebei Chairman Wang Yifang danced around the theme of diversifying China's iron ore interests around the world in a prepared statement. "I believe this is an important transaction in the push of China's iron and steel enterprises to invest into overseas mining assets," stated Yifang. "In addition to the potentially attractive investment returns, Hebei is able to lock up a long term supply of high-quality iron ores, to help improve our operational performance and ensure our long-term, sustainable growth."

In total, the two-part agreement is worth C$194 million: Hebei gets 25.8 million Alderon shares for C$88.2 million and a 25-percent interest in a subsidiary company that will own the Kami project for the C$106 million balance. Hebei also gets a 60-percent offtake agreement, at market prices set by Platts, on production from the Kami project up to 4.8-million tonnes of iron ore a year. Meanwhile, Alderon said Liberty Metals and Mining Holdings, which owns 15 percent of Alderon stock, would keep its shareholding at 15 percent per a pre-emptive right, buying 3.8 million shares for C$13 milllion in proceeds to Alderon.

In the Labrador Trough Hebei joins Wuhan Iron & Steel, reportedly China's third-largest steel producer, as it also pursues early- to advanced-stage iron ore projects through several juniors, including Adriana Resources and Century Iron Mines. Recent comments by Scotiabank commodities analyst Patricia Mohr on Wuhan's activity in the Labrador Trough now apply to Hebei as well.

"China's third-largest steel producer (Wuhan Iron and Steel) has equity interests in three mining ventures in the Labrador Trough - likely spurred by high-quality ore and a desire to diversify supply sources away from the three large mining companies that currently dominate over 80 percent of world seaborne trade," wrote Mohr in a February 28 update on the Scotiabank Commodity Index.

In an email about those comments Mohr agreed such diversification was again at play. She then characterized the Labrador Trough as "a fast-developing new play in iron ore."

Meanwhile, the Hebei-Alderon agreement must still clear a major hurdle: the blessing of the Chinese government. But if recent bureaucratic rubber stamping with Wuhan is a guide, then there is reason to believe the Alderon financing has a good chance of being given the go-ahead. Adriana closed its C$91 million financing and joint venture agreement with Wuhan about a month after announcing it late last year.

To ensure it does not languish overly long in the grips of government red tape, Alderon said it can terminate the deal after 90 days if state approvals do not come through. It also agreed with Hebei that it won't look for alternatives to the deal for 75 days.

Assuming it goes ahead, Alderon will obviously bring in a considerable pot of cash as it moves to complete a feasibility study of the Kami project. This is to build on a recent scoping study in which Alderon outlined Kami as an eight-million tonne per year operation with a 15-year mine life and a $989 million capital cost. Alderon estimated a three-year payback and a $3-billion net present value discounted at eight percent.

But Alderon, as it pushes ahead with feasibility work, has said it plans to look at Kami as a much larger, 16-million tonne per year operation. Notably, were it to go the route of more production, then Hebei would not automatically reap the offtake benefits of the added tonnage, as its quota on concentrate is capped at 4.8 million tonnes a year.

The immediate impact of the announcement is clear: it gives Alderon a huge boost in confidence that it will be able to pull off the Kami project. Dundee analyst David Talbot noted in a briefing to clients Friday that the Hebei agreement reduced risk as regards project financing and off-take.

It also brings on board a "partner with deep pockets," Talbot said.